Market balance changed between OPEC meetings

Sam Fletcher
Senior Writer
In less than 2 months after the December meeting of the Organization of Petroleum Exporting Countries, the global balance between crude supply and demand tightened to the point where it was unnecessary for the group to adjust production at its Jan. 30 meeting, as some earlier predicted.

Unlike the December meeting at which OPEC ministers agreed to eliminate overproduction, the market balance by the end of January "had moved very significantly in their favor," said Paul Horsnell of Barclays Capital Inc., London. Otherwise, he said, the ministers would have had to make "a sizable output cut merely to establish the same position that they are in now without having had to cut."

'Dichotomy' in outlooks
Back in December, there was "a clear dichotomy in views of the global oil market," Horsnell said. More bearish individual projections by the International Energy Agency and the OPEC Secretariat "implied that there would be significant global inventory builds over the coming quarters unless OPEC throttled back on output." However, separate and more bullish estimates by Barclays Capital and the US Department of Energy "suggested that OPEC had about 2 million b/d more margin of error to play with," said Horsnell. "That gap has yet to be fully resolved, but it has narrowed."

He said, "The more bullish forecasts have survived the flow of the extra 7 weeks of [market] data fairly robustly." Barclays Capital's latest estimate of the call on OPEC crude is lower by 100,000 b/d for the fourth quarter of 2004 but unchanged for the first and second quarters of 2005. DOE's current forecast is lower by 100,000 b/d for the final quarter of 2004, down by 300,000 b/d for the first quarter of 2005, and unchanged for the second quarter.

On the other hand, the OPEC Secretariat revised its estimate up by 900,000 b/d for the final quarter of 2004, by 700,000 b/d for the first quarter of 2005, and by 800,000 b/d for the second quarter. IEA pushed up its estimates by 700,000 b/d for the fourth quarter of 2004, 600,000 b/d for the first quarter of 2005, by 300,000 b/d for the second quarter.

"Put another way, the changes in the OPEC Secretariat numbers gave ministers the appearance of an extra 800,000 b/d to play with, compared [with] what they thought they had before," Horsnell said. "With some 40% of the disparity between estimates already resolved, and almost entirely in OPEC's favor, one can see why ministers would be happy to go with the strong momentum in the [market] data and to leave taking actions until such a point as they felt that the momentum might ebb."

Possible $40/bbl 'floor'
The last time the near-month contract for benchmark US light, sweet crudes traded below $40/bbl on the New York Mercantile Exchange was on July 13, 2004. OPEC's decision at the Jan. 30 meeting to maintain production at 27 million b/d while temporarily abandoning a target price band was "further confirmation, if it were needed," that $40/bbl "is now more of a floor to [crude] prices rather than a cap," said Horsnell.

To drive crude prices below $40/bbl "for any significant period would need a significant body of opinion to conclude that OPEC was being too lax with output and had misread the global balances," he said.

However, Horsnell claimed, "The greater danger is that OPEC will not be lax enough. Even if a short-term drive back through $40 succeeded, OPEC does seem to have more than enough ammunition at its disposal to rectify matters. In all, we continue to see the potential outcomes as being highly skewed, with the downside better protected than the upside, even before one adds in some of the current and evolving international policy."

Consensus too low
A Feb. 7 report from the Houston office of Raymond James & Associates Inc. noted the "recent propensity" of Wall Street consensus forecasts of crude and natural gas prices to be too low and offered two plausible explanations:

·Excessive conservatism. "Some analysts seem to be putting out forecasts that represent a 'floor' for where they believe that prices will go rather than their 'best guess,' said Raymond James. When such conservatism becomes excessive, it can lead to unreasonably low forecasts.

·Regression to the mean. Some analysts believe energy prices must inevitably revert back to historical averages. But energy prices are set by market fundamentals, not a statistically random process. And current fundamentals "are greatly different from those that prevailed through most of the 1990s," said Raymond James.

(Online Feb. 8, 2005; author's e-mail: samf@ogjonline.com)


Related Articles

Senate Banking Committee’s crude export debate breaks along party lines

07/28/2015 Congressional committee debate over the 40-year ban on exporting US-produced crude oil continued to break largely along party lines as the US Senat...

Canada’s NEB approves Orca LNG export license

07/28/2015 Canada’s National Energy Board has approved an application by Orca LNG Ltd., Cypress, Tex., for a 25-year natural gas export license (OGJ Online, J...

MARKET WATCH: Oil futures maintain downward momentum

07/28/2015 Light, sweet crude oil futures prices fell July 27 to settle at less than $48/bbl on the New York market while Brent prices on the London market pl...

Removing crude oil export ban would raise product prices, study finds

07/27/2015 Ending the decades-old ban on exporting US-produced crude oil would raise prices by $3/bbl and increase product prices, a study commissioned by Con...

Encana books impairment charge, maintains 2015 budget

07/27/2015 Encana Corp., Calgary, reported a $1.3 billion impairment charge for the second quarter, which executives said reflected a decline in oil and natur...

First bidding round showed Mexico reform challenges, House panel told

07/27/2015 An apparently disappointing first round of bids for oil and gas exploration rights revealed problems that require attention if Mexico’s dramatic en...

MARKET WATCH: Oil futures stay below $49/bbl after gain in US rig count

07/27/2015 Light, sweet crude oil futures prices fell modestly July 24 to remain under $49/bbl on the New York market after Baker Hughes Inc. reported the US ...

EPA proposes voluntary methane reduction program for gas industry

07/24/2015 The US Environmental Protection Agency proposed a voluntary methane reduction program for the natural gas industry that would allow companies to ma...

Petrobras workers stage 24-hr strike

07/24/2015 Workers at beleaguered Petroleo Brasileiro SA (Petrobras) staged a 24-hr strike across Brazil to protest plans by the state-owned company to liquid...
White Papers

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by
Available Webcasts

On Demand

OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST


Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected